THE tax authority is set to crack down on tax evasion and controversial fund transfers by foreign companies through transfer pricing from next fiscal year by implementing a rule for it.Transfer pricing is an accounting method which allows multinational companies to shift net profits or losses to offshore or low-tax countries to maximise their earnings.For instance, two subsidiaries of a company, one based in a high-tax country and another in a low tax haven, can engage in trade with one another. The low-tax subsidiary can quote abnormally high prices from the high-tax subsidiary for goods/services to manage the maximum after-tax profits for the parent company, an unethical practice which many multinational firms resort to. Dubbed the transfer pricing rule, it stipulates that multinationals or foreign companies would furnish statements certified by chartered accountants of transactions above Tk 3 crore with their related or associated entities abroad.The rule, which is included in the Finance Bill 2014, will take effect from July, said a senior official of the National Board of Revenue. The move comes two years after the rule has been framed in a bid to prevent tax dodging by foreign companies. It is also a major reason for capital flight, with the country losing $1.6 billion a year (12480 crore takas) from 2002 to 2011, according to Global Financial Integrity, a Washington-based firm.Anecdotal information and global database indicate that a significant amount of fund is being siphoned off through offshore accounts, second homes’ trade mispricing in the form of over-and under-invoicing and other forms of capital flight, said the Centre for Policy Dialogue, a local research organisation. Bangladesh is a developing country and needs every last dollar of foreign currency it can get. While the figures for capital flight from Global Financial Integrity seem a bit excessive – after all Bangladeshi accounts in Swiss banks were worth only Tk 3236 crore in 2013, nonetheless it may be close to the truth. Sending much needed foreign exchange out of the country hurts our reserves, depreciates our currency, and hurts our balance of payments equilibrium.One way some foreign companies make money in Bangladesh is through opening secondary back to back bank L/Cs which are directly sent to manufacturers in Bangladesh while keeping master L/Cs in their name. This is mostly done through their trading affiliates in Bangladesh, mostly in the RMG sector, among others. It is a new and unique form of transfer pricing which probably exists only in Bangladesh and some other countries which have a history of notoriously weak financial regulations to counter capital flight. This leads to a tremendous loss in tax revenue which hurts our ability to grow economically — thus hurting the country again macro economically. It is time that we train efficient tax agents who will care more about filling the pockets of the country rather than simply lining their own pockets and looking the other way. Do not blame the foreign companies alone without very serious investigation, because cooperation of local business houses is easily available. We have to admit also how corruption has become a state business. We need foreign investors not to feel harassed.
